The picture helps a lot. On the sash, the half-rabbet is cut on the exterior on the sides and top, and on the interior on the bottom; the frame is just the opposite. On a window this size, I'd use two hinges at the bottom and two latches at the top. In the photo, you can see how the builder has installed stopblocks with dowels to limit the amount the window can open--these are a very good idea!

The best way to reduce water infiltration is to remember to close the window. A drip edge of metal or wood placed over the window on the exterior will also help. Basically, you want to divert away from the opening any water running down the wall. You could do it the quick and easy way with a piece of metal flashing, or build an awning, or some solution in-between. If the window fits well, that should eliminate water infiltration.